MONTANA UNIVERSITY SYSTEM WORKERS'''' COMPENSATION PROGRAM NOTES T O FINANCIAL STATEMENTS (Continued)_part2 pot

- MONTANA UNIVERSITY SYSTEM WORKERS' COMPENSATION PROGRAM NOTES T O FINANCIAL STATEMENTS (Continued) June 30,2006 CASH AND INVESTMENTS (Continued) Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer GASB 40 requires that a government entity disclose the amount invested in a separate issuer (except investments held in the U.S government or investments guaranteed by the U.S government) when that amount is at least 5% of total investments As of June 30, 2006, the Program had the following investments that made up more than 5% of the total investments of $1,954,260: Fair Value Percentage of ~nvestments Nebo School District, Utah County, Utah, General Obligation -Refunding Bonds, ~ e r i 1998B ~s 100,OO1 5.12% Clark County, Nevada, General Obligation Flood Control Bonds, Series 1998 100,242 5.13% Metropolitan Park District of Tacoma, Pierce County, Washington, Limited Tax General Obligation Bonds, Series 2002A 199,022 10.18% Wyoming Community Development Authority, Housing Revenue Bonds, Series and 2,2004 98,972 5.06% Wyoming Community Development Authority, Housing Revenue Bonds, Series and 2,2004 145,432 7.44% Douglas County, Nevada, General Obligation Refunding Bonds, Series 2003 246,227 12.60% Public Hospital District No of King County, Washington, Hospital Facilities Revenue and Refunding Bonds, Series 1998 100,858 5.16% Snohomish County, Washington, General Obligation Bonds 249,003 12.74% Paris,Texas Water and Sewer Revenue and Refunding Bonds 100,293 5.13% Salt Lake City, Utah, Water and Sewer Revenue and Refunding Bonds 104,831 5.36% Mequon & Thiensville, Wisconsin, School District School Improvement Bonds 101,439 5.19% Illinois Municipal Electric Agency Power Supply Refunding Bonds 101,683 5.20% Montana Facilities Financial Authority Health Care Facilities Revenue and Refunding Developmental Center Project Bonds 127,452 6.52% Texas State Public Finance Authority, Texas Building and Procurement Revenue Bonds 178,805 9.15% This is trial version www.adultpdf.com MONTANA UNIVERSITY SYSTEM WORKERS' COMPENSATION PROGRAM NOTES TO FINANCIAL STATEMENTS (Continued) June 30,2006 CASH AND INVESTMENTS (Continued) Custodial Credit Risk Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of the investment or collateral securities that are in the possession of the outside party Cash and money market funds are insured The Program's short-term and long-term investments are held by a bank-administered trust fund These investments are uninsured, unregistered, and held by the trustee in the Program's name, therefore classified as category investments Information regarding the collateralization and risk of funds held by the University of Montana is available in the University's comprehensive annual financial report There is no regulatory oversight for the University's investment pool, and the pool does not have a credit quality rating Participants' equity in the pool approximates the fair value of the underlying investments Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment The Program investment policies not formally address interest rate risk In accordance with GASB Statement No 40, the Program has selected the effective duration method to disclose interest rate risk GASB Statement No 40 defines duration as a measure of the debt investment's exposure to fair value changes arising from changing interest rates It uses the present value of cash flows, weighted for those cash flows as a percentage of the investment's full price Effective duration makes assumptions regarding the most likely timing and amounts of variable cash flows arising from such investments as callable bonds, prepayments, and variable-rate debt The Program's investments are categorized below to disclose credit and interest rate risk as of June 30, 2006 Credit risk reflects the bond quality rating, by investment type, as of June 30, 2006 If a bond investment type is unrated, the quality type is indicated by a NR (not rated) Interest rate risk is disclosed using effective duration Both the credit ratings and duration have been calculated excluding cash equivalents Security Investment Type Municipal bonds $ Fair Value 127,452 Credit Quality Rating A+ Effective Duration 1.81 Municipal bonds 593,649 AA Municipal bonds 101,439 AA 65 Municipal bonds 1.131.720 AAA 32 This is trial version www.adultpdf.com MONTANA UNIVERSITY SYSTEM WORKERS' COMPENSATION PROGRAM NOTES TO FINANCIAL STATEMENTS (Continued) June 30,2006 CASH AND INVESTMENTS (Continued) The following is a calculation of the increase (decrease) in the fair value of investments for the fiscal year ended June 30, 2006: Fair value at June 30,2006 Add: Proceeds of investments sold in fiscal year 2006 Less: Cost of investments purchased in fiscal year 2006 Less: Fair value at June 30,2005 Change in fair value of investments $ (u LONG-TERM DEBT On July 11, 2003, the Program issued $2,050,000 of Series 2003 Workers' Compensation Program Revenue Bonds The bonds were issued at par, bear interest of 2.8%, and are secured by premiums charged to participants within the Montana University System Proceeds from the bonds were used to establish an initial reserve for self-insured claims Long-term debt as of June 30,2006, consists of $2,050,000 Series 2003 Workers' Compensation Program Revenue Bonds, 2.8% interest due semiannually, principal annually to May 2008; secured by premium revenue Less current portion (420,000) During the period ended June 30,2006, $33,813 of interest expense was recognized Debt service requirements to maturity on the revenue bonds at June 30,2006, are as follows: Year endinp June 30, 2007 2008 Principal 420,000 430.000 Interest 23,800 12.040 Total 443,800 442.040 RELATED PARTIES Certain employees of the campuses of the university system provide services to the Program at no charge The value of such services has not been determined This is trial version www.adultpdf.com - MONTANA UNIVERSITY SYSTEM WORKERS' COMPENSATION PROGRAM NOTES TO FINANCIAL STATEMENTS (Continued) June 30,2006 UNPAID CLAIMS LIABILITIES As discussed in footnote 1, the Program establishes actuarial estimated unpaid claims liabilities The estimated unpaid claims incurred but not reported and loss development liability have been adjusted to reflect the actuarial estimates of the ultimate cost of claims The management of the Program has set the unpaid claims liability at the actuary's best estimate for 2006 The following represents changes in the aggregate unpaid claims liabilities, excluding unallocated claim adjustment expense, for the Authority for 2006: Total present value of estimated unpaid claim losses at beginning of year Changes in the estimated unpaid claim losses: Provision for insured events of the current year Increase (decrease) in provision for insured events of prior years Total incurred claims 2.5 15,000 Payments (including claims legal defense): Claims paid attributable to insured events of current year Claims paid attributable to insured events of prior years Total payments 1.1 14.567 Total present value of estimated unpaid claim losses at end of year The estimated liability for workers' compensation claims as of June 30,2006 consist of the following: Estimated claims reported but unpaid Estimated claims incurred but not reported and loss development This is trial version www.adultpdf.com - MONTANA UNIVERSITY SYSTEM WORKERS' COMPENSATION PROGRAM CLAIMS DEVELOPMENT INFORMATION F Fiscal and Policy Year Ended r L d L 2004 2005 $ 2,425,230 $3,047,625 2,174,000 2,366,000 - - 2,174,000 2,174,000 2,037,000 Required contribution and investment revenue Earned Ceded Net earned 2,366,000 2,565,000 (137,000) 199,000 d Unallocated expenses Estimated incurred claims and expenses, end of policy year Incurred Ceded Net incurred r bd Net paid (cumulative) as of: End of policy year One year later Two years later Reestimated ceded claims and expenses r Reestimated net incurred claims and expenses End of policy year One year later Two years later r b d r b4 Ic L d r k Increase (decrease) in estimated net incurred claims and expenses from end of policy year See the accompanying independent autitors' report on supplemental information This is trial version www.adultpdf.com 16 b d Montana Club Building P.O Box 1164 Helena, Montana 59624 ph (406) 442-6901 fx (406) 442-9690 www.jccscpa.com ? il F ,d unkermier Clark Campanella Stevens P.C Certified Public Accountants and Business Advisors REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Committee Montana University System - Workers' Compensation Program Missoula, Montana We have audited the financial statements of Montana University System - Workers' Compensation Program, (an enterprise fund of the State of Montana) as of and for the year ended June 30, 2006, and have issued our report thereon dated September 7, 2006 We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States Internal Control Over Financial Reuorting In planning and performing our audit, we considered Montana University System - Workers' Compensation Program's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses A material weakness is a reportable condition in which the design or operation of one or more of the internal control components, does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses Compliance and Other Matters As part of obtaining reasonable assurance about whether Montana University System - Workers' Compensation Program's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we not express such an opinion The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards However, we noted certain matters that we reported to management of Montana University System - Workers' Compensation Program in a separate letter dated September 7,2006 Bozeman This is trial version www.adultpdf.com Great Falls Helena Kalispell Missoula Whitefish Independent Auditors' Report on Internal Control and Compliance Page This report is intended solely for the information and use of the audit committee, management, others within the Montana University System - Workers' Compensation Program, and is not intended to be and should not be used by anyone other than these specified parties Junkermier, Clark, Campanella, Stevens, P C Helena, Montana September 7,2006 This is trial version www.adultpdf.com 'The University of Montana Vice President, Administration and Finance The University of Montana Missoula, Montana 59812-3826 Phone: (406) 243-4662 FAX: (406) 243-5537 October 18,2006 Junkerrnier, Clark, Campanella, Stevens, P.C Certified Public Accountants P.O Box 164 Helena, Montana 59624 RE: Montana University System -Workers Compensation Program response Dear Junkermier, Clark, Campanella, Stevens, P.C We have reviewed the draft audit report for the Montana University System -Workers Compensation Program We are pleased that our Program meets accounting standards and that no recommendations for improvement were noted Sincerelv Rosi Keller, Associate Vice President, UM Chair, Finance Committee, Montana University System - Workers' Compensation Program h d An Equal Opportunity University This is trial version www.adultpdf.com Montana Club Building P.O Box 1164 Helena, Montana 59624 ph (406) 442-6901 Junkermier Clark Campanella Stevens EC fx (406) 442-9690 www.jccscpa.com Certified Public Accountants and Business Advisors September 7,2006 To the Committee Montana University System Workers' Compensation Program Missoula, Montana 59801 We have audited the financial statements of Montana University System - Workers' Compensation Program, for the year ended June 30, 2006 and have issued our report thereon September 7, 2006 Professional standards require that we provide you with the following information related to our audit Our Responsibilitv under Generally Accepted Auditinp Standards and Government Auditing Standards As stated in our engagement letter July 21, 2005 and our renewal letter dated July 10, 2006, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance about whether the financial statements are free of material misstatement and are fairly presented in accordance with U.S generally accepted accounting principles Because an audit is designed to provide reasonable, but not absolute assurance and because we did not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us As part of our audit, we considered the internal control of Montana University System - Workers' Compensation Program Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of Montana University System - Workers' Compensation Program's compliance with certain provisions of laws, regulations, contracts, and grants However, the objective of our tests was not to provide an opinion on compliance with such provisions Si~nificant account in^ Policies Management has the responsibility for selection and use of appropriate accounting policies In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application The significant accounting policies used by Montana University System - Workers' Compensation Program, are described in Note to the financial statements No new accounting policies were adopted and the application of existing policies was not changed during the fiscal year ended June 30, 2006 We noted no transactions entered into by the Program during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus Bozeman This is trial version www.adultpdf.com Great Falls Helena Kalispell Missoula Whitefish To the Committee Montana University System - Workers' Compensation Program September 7,2006 Page Accountinp Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected The most sensitive estimate affecting the financial statements was the estimated claims liability Management's estimate of the claims estimate is based on an actuarial calculation performed by Milliman, Inc., the Program's consulting actuaries We evaluated the key factors and assumptions used to develop the estimated claims liability in determining that it is reasonable in relation to the financial statements taken as a whole Audit Adiustments For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures An audit adjustment may or may not indicate matters that could have a significant effect on the Organization's financial reporting process (that is, cause future financial statements to be materially misstated) In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by the Organization, either individually or in the aggregate, indicate matters that could have a significant effect on the Organization's financial reporting process Disa~reements with Manapement For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the financial statements or the auditor's report We are pleased to report that no such disagreements arose during the course of our audit Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations If a consultant involves application of an accounting principle to the Organization's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts To our knowledge, there were no such consultations with other accountants This is trial version www.adultpdf.com To the Committee Montana University System - Workers' Compensation Program September 7,2006 Page Issues Discussed Prior to Retention of Independent Auditors We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Program's auditors However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention Difficulties Encountered in Performin9 the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit This information is intended solely for the use of the Committee and management of Montana University System - Workers' Compensation Program, and should not be used for any other purpose Junkermier, Clark, Campanella,Stevens, PC Helena, Montana This is trial version www.adultpdf.com ... reportable condition in which the design or operation of one or more of the internal control components, does not reduce to a relatively low level the risk that misstatements in amounts that would... System - Workers'' Compensation Program Missoula, Montana We have audited the financial statements of Montana University System - Workers'' Compensation Program, (an enterprise fund of the State... tests of Montana University System - Workers'' Compensation Program'' s compliance with certain provisions of laws, regulations, contracts, and grants However, the objective of our tests was not to